SAINT LOUIS UNIVERSITY School of Engineering and Architecture

AR325 D BUILDING TECHNOLOGY 4 4:00-7:00 pm Rm No H710 2nd SEM SY: 2012-2013

RSW PR-02 BUILDING ESTIMATES

Issued: 13NOV2012 Due: 04DEC2012

ARCH. EDUARDO B. LLEDO, MSME Instructor ABERIN, ALYSS ANGELI F. Student

Page | 1

TABLE OF CONTENTS Definition of estimating What estimates are made on projects Importance of accurate estimates When estimates are required Effort and duration Estimating accuracy Types of estimating Estimating methods Top down estimating Bottom up estimating Parametric estimating Estimating techniques Weighted average estimates Consensus estimating Phase ratios Estimating assumptions Applying contingency to estimates Recommended estimating principles Verification of estimates Cost Estimating Process Determine Estimate Basis Prepare Base Estimate Review Base Estimate Determine Risks and Set Contingency 4 4 4 5 6 6 6 6 7 7 8 9 9 9 10 11 12 12 13 13 14 14 15 15

Page | 2

Determine Estimate Communication Approach Key information about the project to others. Cost Estimate Process Cost Estimating Methodology Cost Estimating and Project Development Level PS&E Characteristics of Estimators Estimating Variance Estimating Sample 01 Estimating Sample 02 Bibliography (Definition of Terms) References

16 17 18 19 22 27 29 29 33 44 63 67

Page | 3

Definition of estimating To form an approximate notion of the amount, number, magnitude or position of anything, without actual enumeration or measurement. What estimates are made in projects 1. Time estimates are used in scheduling work, assigning resources and determining delivery dates. 2. Cost estimates are used for budgeting. 3. Cost and benefit estimates are used in cost/benefit analysis to determine the overall viability of a project. Importance of accurate estimates 1. Inaccurate time estimates can result in inefficient use of resources and late delivery. 2. Inaccurate cost estimates can result in insufficient budget being allocated, or excess budget being set aside for the project when it could be used for other projects. 3. If the cost or benefits estimates are inaccurate this can lead to incorrect decisions about proceeding with the project being made. When estimates are required Project phase Estimates required

Page | 4

Initiation

Time, cost and benefit estimates in project definition.

.Planning

Time estimates in project schedule. Cost estimates in project budget. Cost and benefit estimates in business case.

Start of project stages

Time and cost estimates reconfirmed for the stage.

Effort and duration In estimating it is essential to know whether the estimate is an effort or duration based estimate. Effort is the amount of work required to complete a task used to estimate cost of resources. Duration is the time that elapses between the start and end of the task used to estimate timeframe. This takes account of the fact that people usually work on multiple tasks, in or outside of a project. Only if they can work on a task for 100% of their working time will effort equal duration. Normally they will work intermittently on the task and there may be time required to complete a task where no human activity is required.
Page | 5

For example, the estimate for painting a room may be 10 hours for two people (20 hours effort), over 3 days (duration) allowing for other tasks and for the drying time of the paint. Estimating accuracy Estimating accuracy increases during the life of the project as more knowledge is gained about the project. Information Available (%)

Types of estimates Different types of estimates reflect the range of accuracy expected from the estimate. Three types of project estimates* are: 1. Order of magnitude: obtained in the initiation phase of a project for the whole project with a range of 25 to +75%. 2. Budget estimate: an estimate derived during the planning phase for the whole project with a range of 10% to +25%

Page | 6

3. Definitive estimate: an estimate derived at the start of each project stage for that stage with a range of 5% to +10%

Estimating methods Three commonly used methods of estimating are: 1. Top down estimating 2. Bottom up estimating 3. Parametric estimating Top-down method The top-down method is also known as the analogous method. It is used to determine order of magnitude estimates in the initiation phase of the project. The method uses the actual durations, effort or costs from previous projects as a basis for estimating the effort or costs for the current project. 1. Identify a previous project or section of a previous project that is similar to the current project. 2. Assess the extent to which the current project is similar to the previous project the comparison factor (e.g 1.5 if the current project is estimated to be 50% larger). 3. Compute the estimate for the current project based on the actual durations, effort or costs from the previous project and the comparison factor. Bottom-up method
Page | 7

The bottom-up method is considered to be the most accurate method for generating project estimates. It is used to determine budget or definitive estimates during the planning phase and at the start of each project stage. The method uses the Work Breakdown Structure (WBS) developed during the planning stage of the project. Estimates are created for all tasks at the lowest level of the WBS and then these are accumulated to determine the estimates for the whole project. The consensus technique* is usually used to obtain task estimates for the low level tasks on the WBS, because as well as producing reliable estimates it also builds active involvement, cooperation and commitment. Experts with the skills required to perform the work should be included in the estimating process. One disadvantage of the bottom-up method is that it is much more timeconsuming than other methods. Parametric method The parametric method is also known as the object based method. It is used to obtain definitive estimates and to confirm bottom up estimates where possible. A simple concept is used, namely: If the amount of effort needed to carry out a particular activity for a particular object is known, and the number of objects is known, the effort required to perform the activity for all the objects can be determined. The amount of effort for the single activity can be determined either from a standard, which has been established from previous experience, or by executing a sample activity if no standard exists.
Page | 8

Steps in deriving the estimate: 1. Identify an item to be estimated. 2. Estimate the number of items. 3. Estimate the effort per item. 4. Multiply effort per item by number of items to determine the total effort. For example, if the assembly of one library shelving stack takes an hour and a half and there are 40 stacks to assemble then the total effort is 60 hours. Estimating techniques Three commonly used techniques for obtaining estimates are: 1. Weighted average estimating 2. Consensus estimating 3. Phase ratios Weighted average estimates 4. Weighted average estimating is also known as sensitivity analysis estimating. 5. With this technique three estimates are obtained for each item rather than one. This provides a more accurate estimate than when only one estimate value is provided. 6. The three estimates are known as the best case (O = Optimistic), worst case (P = Pessimistic) and most likely (M = Median). 7. These are then used in the following formula to determine the estimated effort:
Page | 9

Estimated effort = (O + 4M + P ) / 6 Consensus estimating Steps in conducting a consensus estimating session: A briefing is provided to the estimating team on the project. Each person is provided with a list of work components to estimate. Each person independently estimates O, M and P for each work component. The estimates are written up on the whiteboard. Each person discusses the basis and assumptions for their estimates. A revised set of estimates is produced. Averages for the O, M and P values are calculated. These averages are then used in the weighted averages formula to calculate the estimated effort. Phase ratios Project phase ratios provide a means of generating a top-down order of magnitude duration estimate for a project, or they can be used as a sense check of bottom-up duration estimates of the time allocated to each project phase. Phase ratio estimating uses an estimate for one phase of a project to derive the likely size of the other phases, and hence an overall estimate for the project. For example, if analysis takes 5 weeks, and this represents 10% of the project, then the project is likely to take 50 weeks.

Page | 10

 The concept behind this method is that similar types of projects would normally spend the same percentage of time in each phase. Phase ratios are not accurate enough to be used as a budget or definitive estimates. Phase ratio percentages The phase ratio technique is based on studies that average the proportion of time that a large sample of projects has spent on standard project phases. An initial set of project phase ratios is provided below. These should be refined based on results from completed projects. Phase Ratio 5% 20% 10% 10% 20% 20% 10% 5%

Initiation Planning Analysis Design Construction Testing Implementation Closure Estimating assumptions

An estimate is a qualified guess. Every estimate is based on assumptions.

Page | 11

An estimate assumption is a statement which has been considered to be true in deriving the estimate. These estimate assumptions need to be specified so that the basis of the estimate is known and validity of the assumptions can be assessed. For example, a work effort estimate is usually based on a level of skill and expertise. If a lower level of skill and expertise is utilised then it is likely that the task will require more effort.

Applying contingency to estimates Can be applied to each project stage or to each task. It provides a buffer to absorb the impact of dealing with unforeseen issues or complexities in completing the task or stage. Assess the uncertainty of the estimate and the level of risk. Assess the length of time between when the estimate is produced and when the estimated task or stage is likely to be executed. For example, if there are four sequential stages to a project, then there is more uncertainty about the last stage than the first and hence the contingency for the last stage should be greater. Apply an increase to the estimate as a contingency in line with the uncertainty, risk and the length of time to execution. Apply the contingency as a percentage of the estimate, 10% is often used as an average. Recommended estimating principles Always obtain at least two estimates.
Page | 12

 Involve the people who will be doing the work (or with the skills to do the work if resources have not yet been allocated) in the estimating process and the people who require the work done where possible. Use more than one estimating method. Each estimate must be independently derived. Review the estimates and rationalise the differences. Document assumptions made Add contingency based on the level of uncertainty and risk. Get agreement and commitment from the project team for their task estimates and also from the project sponsor for the overall project estimate. Review and refine the estimates as the project proceeds based on progress. Verification of estimates Estimates need to be reviewed to check they are realistic. Using more than one method of estimating and/or two or more independent estimators to produce estimates, then comparing these provides a very effective verification of the estimates. For example, phase ratios is a useful technique for checking estimates derived by other means. As tasks progress, regularly obtain updated estimates of effort, and time to complete the tasks from the resources performing the tasks. These are called revised estimates and should be used to keep project schedules continually up to date.
Page | 13

Cost Estimating Process All projects benefit from following a thoughtful and deliberate process in developing project cost estimates. The process presented in Figure 1 describes the way WSDOT develops its project cost estimates. It is applied to all levels of project delivery, starting with the planning level estimate and ending with the project design and plan, specification, and estimate (PS&E) level. Each level of estimate may require different estimating inputs, methods, techniques and tools. The task of cost estimating, by its very nature, requires the application of prudent judgment to the completion of the task. Determine Estimate Basis This activity focuses on obtaining project information, including all previously developed project scope and schedule details and data, from which a project cost estimate can be prepared. The level of scope detail varies depending on the project phase, project type, and project complexity, but would include the design matrix and criteria, all assumptions and pertinent scope details. The estimate basis should be clearly documented and forms the beginning of the estimate file that should be prepared for each estimate. Each of the following steps will add information to this file, with the end result being a complete traceable history for each estimate. Prepare Base Estimate This activity covers the development of estimated costs for all components of a project, excluding future escalation. These components may be estimated using different techniques depending on the level of scope definition and the size and complexity of the project. The number and detail of components estimated may vary depending on the project development phase. For example, in the scoping phase the cost estimate covers preliminary engineering, Right Of Way (ROW), and construction. As the
Page | 14

design progresses and more details are known, pieces of the estimate become more detailed. Key inputs to this activity include project scope details, Historical Databases and other cost databases, knowledge of Market Conditions, and use of Inflation Rates. WSDOT has internal specialty groups that should be used to provide estimate information when preparing base estimates. A required component of the base estimate step is the preparation of a Basis of Estimate document that describes the project in words and includes underlying assumptions, cautionary notes, and exclusions. The base estimate should also be based upon, and include as an attachment for reference, the associated schedule for all remaining project activities. For conceptual level base estimates the schedule will be cursory and very broad in its coverage. However, as a minimum it should include the major milestones that WSDOT uses to measure performance and progress on projects. The conceptual level schedule may only include a few activities, but should begin with the development of the project, and include ROW, design, and construction phases. Review Base Estimate This activity is necessary to ensure that (1) assumptions and basis are appropriate for the project, (2) the base cost estimate is an accurate reflection of the projects scope of work; (3) scope, schedule and cost items are calculated properly and required components are not missing or double counted; and (4) historical data, the cost based estimate data, or other data that was used reasonably reflects project scope and site conditions. Internal specialty groups and/or Subject Matter Experts (SMEs) must participate in reviewing the Base Estimate.
Page | 15

Determine Risks and Set Contingency

This activity is part of developing a risk management plan for a project, and is an integral component of project management planning see the Project Management Online Guide. Risk management is an active and ongoing process of maximizing the probability and consequences of positive risk events (opportunities) and minimizing the probability and consequences of negative risk events (threats) to the project objectives. In the context of cost estimating, the cost impact of project risks (favorable or unfavorable) must be included to derive a total project cost. If necessary, internal and/or external specialists are involved in a workshop format to validate the Base Estimate, provide input on specific issues such as construction staging, and elicit risks for modeling purposes. Formal risk assessment at WSDOT typically occurs in workshops such as Cost Risk Assessment (CRA) and Cost Estimate Validation Process (CEVP) workshops. Formal or informal risk assessment techniques are a valuable and valid tool and should be applied to all estimates. WSDOTs project risk management policy is found in Secretarys Executive Order #E 1053.00. Determine Estimate Communication Approach Cost estimate data is communicated to both internal and external constituencies. The communication approach determines what estimate information should be communicated, who should receive this information, how the information should be communicated, and when the information should be communicated. Cost estimate information should be included when the communication plan is developed as part of the project management process. Often the words are as important as the numbers.

Page | 16

The Basis of Estimate document can be used effectively as a communication tool to convey

key information about the project to others. Conduct Independent Review and Obtain Management Endorsement Estimates are key products of the project management process and are fundamental documents upon which key management decisions are based. Given their importance, all estimates should receive an independent review and then be reconciled and revised as needed to respond to independent reviewer comments. Once independent review comments have been satisfactorily incorporated, estimates should be presented to management staff for approval. Management approval of estimates developed for initial budgeting or baseline definition is a defined step in the project management process. Revised estimates, typically developed if project requirements change, or as design is developed, should also be reviewed by management staff, revised as necessary to reflect management comments, and then approved. Each revised estimates shall then be incorporated into project cost baselines through the established project change management process.

Page | 17

Page | 18

Cost Estimating Methodology Estimating methodologies fall into one of four categories: parametric, historical bid-based, cost based and risk-based. These categories encompass scores of individual techniques/tools to aid the Estimator in preparing cost estimates. It is important to realize that any combination of the methods may be found in any given estimate. Two specialty items, bridges and nonstandard retaining walls, are both estimated by the HQ Bridge and Structures Office. These two items as well as other specialty items such as Traffic, Right Of Way acquisition, Environmental and Utilities are covered under the Specialty Groups section. Parametric methods are applied to projects in the planning, scoping, or early design stage, and involve techniques that use historical data to define the cost of typical transportation facility segments, such as cost per lane mile, cost per interchange, cost per square foot, and cost per intersection. Typically the historical bid prices used to develop the estimate come from previous projects awarded by WSDOT out of databases such as EBASE or BidTabs Professional. Two techniques that are commonly used in parametric estimating are 1) analogous (similar) projects and 2) historical percentages. WSDOT has other commercial estimating software available that can support parametric estimating for projects for which WSDOT does not have relevant historical data. Two tools that employ parametric methods include: Mobility Project Prioritization Process (MP3), which is an Excel workbook. http://www.wsdot.wa.gov/mapsdata/tdo/mobility.htm Planning Level Project Cost Estimating (PLCE), which is an Access database. Contact Murshed Delwar at delwarm@wsdot.wa.gov for more information on this tool. Historical bid-based methods are commonly used to develop WSDOT Engineers Estimates, and are appropriate when design definition has
Page | 19

advanced to the point where quantification of units of work is possible. These methods apply historical unit costs to counts or measures of work items to determine a total cost for the item or project. The unit cost data used is typically received by WSDOT in bid documents from prior projects and should be modified or adjusted to reflect current prices (inflated to current time) and project specific conditions such as geographic location, quantity of item needed, and the scheduled timing of project advertisement (see the Important Factors section for more information). Techniques such as historical bid pricing, historical percentage, and cost based estimating are also used to determine unit prices. Historical cost data sources include: E-base BidTabs Professional Unit Bid Analysis RS Means, when WSDOT-specific unit costs are not available (this tool can be used for both historic bid based and cost based methods) Cost-based estimate methods do not rely on historical WSDOT bid data, but rather are based on determining, for an item or set of items, the contractors cost for labor, equipment, materials and specialty subcontractor effort (if appropriate) needed to complete the work. A reasonable amount for contractor overhead and profit is then added. This method is preferable on unique projects or where geographical influences, market factors and volatility of material prices can cause the use of historical bid-based methods to be unreliable. Also, since contractors generally utilize a cost-based estimating approach to prepare bids, this method can provide more accurate and defensible costs to support the
Page | 20

decision for contract award/rejection and to support any future price negotiations with the contractor after contract award. Cost-based estimates require significant effort, time, and estimator experience to prepare. They should be limited to those items that comprise the largest dollar value of the project, typically that 20% of items of work that account for 80% of project cost. The cost of the remainder of estimate line items can be determined using Historical Bid-Based Estimate methods. This approach provides for a more efficient use of estimating resources and reduces the total time and cost of preparing Cost-Based Estimates. Cost based estimating is also a good way to check a few large items of work in a historical bid based estimate to ensure that the historical prices are still valid. Risk-based estimate methods involve simple or complex analysis based on inferred and probabilistic relationships between cost, schedule, and events related to the project. It uses a variety of techniques, including historical data, cost based estimating, and the best judgment of subject matter experts for given types of work, to develop the Base Cost (the cost of the project if all goes as planned). Risk elements (opportunities or threats) are then defined and applied to the Base Cost through modeling (Monte Carlo Simulation) to provide a probable range for both project cost and schedule. Depending on the projects magnitude, complexity, and controversy, the following tools are available to develop a risk based estimate: 1. Cost Estimating and Validation Process (CEVP) workshops which includes external subject matter experts http://www.wsdot.wa.gov/Projects/ProjectMgmt/RiskAssessment/ 2. Cost Risk Assessment (CRA) workshops, typically held internally
Page | 21

3. Small internal workshops using the Self-Modeling Excel workbook http://www.wsdot.wa.gov/Projects/ProjectMgmt/RiskAssessment/Informati on.htm WSDOTs risk based estimating policy can be found at: http://www.wsdot.wa.gov/publications/fulltext/cevp/1053policy.pdf Current risk based estimating policy is summarized as follows: It is the policy of the Washington State Department of Transportation (WSDOT) to perform Project Risk Management on all projects. It is the policy of the WSDOT to conduct risk based estimating workshops for all projects over $10 Million. This policy reaffirms the requirement that a risk management plan is a component of every project management plan, as required under Executive Order E 1032.00 Project Management. This policy statement advances the effort to identify, share and manage risks across all organizations and functions as directed under Executive Order 1038.00 Enterprise Risk Management. Levels of risk based estimating, in support of risk management: Project Size ($) Required Process (project managers can use a higher level process if desired) Less than $10 M Qualitative Spreadsheet in the Project Management Online Guide $10 M to $25 M Self-Modeling Spreadsheet $25 M to $100 M Cost Risk Assessment (CRA) Workshop Greater than $100 M Cost Estimate Validation Process (CEVP) Workshop Cost Estimating and Project Development Level There are four main phases or levels of project development:
Page | 22

1. Planning 2. Scoping 3. Design 4. Plans, Specifications and Estimate (PS & E) The estimate for each level of project development has a specific purpose, methodology, and expected level of accuracy. Table 1 summarizes the relationship that exists between project development levels, purpose of the estimate, estimating methods, and the estimates expected level of accuracy. Note the inverse relationship between the project development level and the expected accuracy range. Some of the typical causes of project cost uncertainty are lack of scope definition, multiple alternatives, and lack of information about factors outside the roadway prism (ROW, community, cultural, and environmental). As the project progresses, more data is available and the expected accuracy range narrows. Planning The planning level estimate is used to estimate funding needs for long range planning and to prioritize needs for the Highway System Plan. These estimates are typically prepared with little detail to the project definition. Techniques Parametric estimating techniques are often used for planning estimates. Lane mile and square foot are two types of parametric estimating techniques. Historical bid prices and historical percentages can be used to generate costs for these parameters. Analogous project estimating is another approach that can be used. Commercial estimating programs are available to assist in parametric estimating, especially for projects that have little or no historical data available in WSDOT databases. WSDOT has developed two tools that employ parametric methods to prepare planning level estimates:

Page | 23

 Mobility Project Prioritization Process (MP3), which is an Excel workbook. This program evaluates both costs and benefits to arrive at a benefit/cost ration for use in planning level analysis and selection. http://www.wsdot.wa.gov/mapsdata/tdo/mobility.htm Planning Level Project Cost Estimating (PLCE), which is an Access database. This tool is primarily a planning level cost estimating tool, most suited for urban environments. . Contact Murshed Delwar at delwarm@wsdot.wa.gov for more information on this tool. Concerns When using analogous project estimating, the chosen historical project must be truly analogous. Finding an appropriate project or projects and determining the similarities and differences between the historical projects and the current project can take significant time and effort. Project data from older projects is less reliable due to variations in prices, standards, construction technology, and work methods. The analogous method is best used as a tool to determine broad price ranges for simple, straight forward projects or as a check to verify estimates prepared using another method. Due to the lack of scope definition or preliminary design, care should be taken to properly communicate with project stakeholders regarding the range of possible cost and schedule changes as the project becomes more defined. Given the large-scale assumptions inherent in Parametric Estimating methods, the estimator must document all assumptions clearly.

Page | 24

 Provide an adequate range of costs that reflects the unknowns in the project (see Table 2 ). This can be accomplished through allowances in the estimate for those items not yet defined or quantified. Keep the estimate current as the project waits to move on to scoping. Scoping A scoping level estimate is used to set the baseline cost for the project and to program the project. A project is programmed when it is entered into the Capital Improvement and Preservation Program (CIPP) and the Biennial Transportation Program. The scoping estimate is important because it is the baseline used by the Legislature to set the budget and all future estimates will be compared against it. Clearly document assumptions and scope definitions in the Basis of Estimate document so that all future changes can be accurately compared to this estimate. Techniques Historical Bid-Based, Cost-Based, Parametric, and Risk-Based: The estimator will be able to determine approximate quantities for items such as asphalt, concrete pavement, structures, and roadway excavation. For such quantifiable items, Historical Bid-Based or Cost-Based estimating methodologies should be used for pricing. Other items not yet quantified may be estimated parametrically or through the use of historical percentages. Risks should be identified, and a Risk Management Plan developed to be included in the estimate notebook for future reference. Concerns Create / Update Basis of Estimate. All changes, assumptions, and data origins should be clearly documented. This is particularly important because any future estimates will be compared with this one to justify changes in the cost of the project.
Page | 25

 Estimators should guard against false precision; that is assuming a level of precision that is not inherent to this level of estimate. Although a properly developed estimate will include well documented assumptions, many of the details that impact project cost are not defined at the time a scoping level estimate is done. Miscellaneous item allowance in design at this level of design definition typically ranges from 20% to 30%, and ranges even higher on non-standard projects (see Table 2). This includes rounding costs (and quantities) to an appropriate significant figure. It is important to choose the correct unit costs for major items and then correctly inflate those costs to current dollars. Use sound risk identification and quantification practices to ensure that major risks to the project are identified and documented. Design Estimates prepared at the various design levels, including Geometric Review, General Plans Review and Preliminary Contract Review are used to track changes in the estimated cost to complete the project in relation to the current budget (CIPP or Book amount). Each time the estimate is updated the Cost Estimate Process detailed in Figure 1 should be followed. The current project cost budget and schedule should be compared to the new estimate. Clearly document each of these updates in relation to the previous estimate and include the documentation in the estimate file. If the budget or scope of the project needs to be updated, fill out and submit a Project Change Request Form. The final Engineers Estimate, along with supporting documents, is required to be filed in the Design Documentation Summary (DDS). Design approval is an important stage of design for estimating purposes. At design approval the configuration of the project is known. This will solidify many items in the scope such as Right of Way needs, likely permit conditions, environmental mitigation, quantities of major items and outside stakeholders. As scope definition improves, the accuracy of the estimate will
Page | 26

likewise improve. The work effort required to prepare, document and review the estimate also increases. Techniques Historical Bid-based, Cost-based and/or Risk-based. As design definition advances, design engineers and estimators are better able to determine project work items and their associated quantities and unit prices. Historical Bid-based methodologies are typically used for items of work for which historical data is available. Cost-based estimating methodologies can be used for those items with little or no WSDOT bid history, or for major items of work that are project cost drivers. Key resources are suppliers and other individuals knowledgeable about current prices for the subject items, typical construction methodology and production rates, and equipment used. The estimator should contact these resources to develop basic cost data for materials, labor and equipment. Review risks identified earlier in the project development process and update the Risk Management Plan to reflect the current design level and risks. Concerns As with the Scoping Level Estimate mentioned above, estimators should guard against false precision thinking they know more about a project than they do. Significant project definition continues to be developed until the project is ready for advertisement. Use appropriate item allowances and ranges for estimates (see Table 2,). If cost based estimating techniques are used, pay special attention to documenting all of the assumptions that are made in the development of unit prices such as the crew size, crew make up, production rates, equipment mix and type. The costs assumed for contractor overhead and profit as well as for subcontractor work should also be clearly documented. It is important to remember that these decisions may not reflect the decisions of the individual contractors that will bid the job, thus introducing elements of risk into the estimate. PS&E
Page | 27

The Engineers Estimate is prepared for the Final Contract Review in preparation for advertisement and is used to obligate construction funds and to evaluate contractors bids. Techniques Historical bid-based, Cost-based and Risk-based. The project has matured to a point that design engineers and estimators are able to specify all items of work that will be required for the project and accurately estimate quantities and unit prices. This level of project estimate has the advantage of detailed understanding of project scope and conditions. If the estimators are from outside the project team, they should take special care to understand the details of the project, including performing a detailed review of the plans and specifications. All quantities and unit prices should reflect current knowledge at the time of the estimate. Clearly document the development of and adjustments to line item quantities and prices. This is critical for both the review of the estimate and the review of bids prior to award. This data should be clearly defined and identified in the estimate file. Historical Bidbased methodologies should be used for most items of work where historical data is available. Cost-based estimating methodologies can be used for those items with little or no WSDOT bid history, or to check major items of work that significantly impact on the total project cost. Review the risks again and update the Risk Management Plan. Concerns Reviews of these types of estimates should be extensive and detailed and should include final independent QA/QC checks of calculations, prices and assumptions. The Basis of Estimate and overall estimate documentation package should be carefully reviewed to make sure they are complete, accurate and easily understood, and that all figures, from detailed backup to summary levels, are traceable.

Page | 28

 Major quantities and cost drivers should be carefully checked to assure that they have been properly calculated (proper conversion factors have been used and allowances applied to neat line quantities if applicable). Specialty group estimates should be reviewed for both scope and cost. Contract Special Provisions should be carefully reviewed and cost and schedule impacts incorporated into the Engineers Estimate. Characteristics of Estimators Statistics are used to estimate parameters. Three important attributes of statistics as estimators are covered in this text: unbiasedness, consistency, and relative efficiency. Most statistics you will see in this text are unbiased estimates of the parameter they estimate. For example, the sample mean, M, is an unbiased estimate of thepopulation mean, . All statistics covered will be consistent estimators. It is hard to imagine a reasonably-chosen statistic that is not consistent. When more than one statistic can be used to estimate a parameter, one will naturally be more efficient than the other(s). In general the relative efficiency of two statistics differs depending on the shape of the distribution of the numbers in the population. Statistics that minimize the sum of squared deviations such as the meanare generally the most efficient estimators for normal distributions but may not be for highly skewed distributions. Estimating Variance The formula for the variance computed in the population, , is different from the formula for an unbiased estimate of variance, s, computed in a sample. The two formulas are shown below:
Page | 29

 = (X-)/N s = (X-M)/(N-1) The unexpected difference between the two formulas is that the denominator is N for and is N-1 for s. That there should be a difference in formulas is very counterintuitive. To understand the reason that N-1 rather than N is needed in the denominator of the formula for s, consider the problem of estimating when the population mean, , is already known. Assume that you knew that the mean amount of practice it takes student pilots to master a particular maneuver is 12 hours. If you sampled one pilot and found he or she took 14 hours to master the maneuver, what would be your estimate of ? The answer lies in considering the definition of variance: It is the average squared deviation of individual scores from . With only one score, you have one squared deviation of a score from . In this example, the one squared deviation is: (X - ) = (14-12)= 4. This single squared deviation from the mean is the best estimate of the average squared deviation and is an unbiased estimate of . Since it is based on only one score, the estimate is not a very good estimate although it is still unbiased. It follows that if is known and N scores are sampled from the population, then an unbiased estimate of could be computed with the following formula: (X - )/N. Now it is time to consider what happens when is not known and M is used as an estimate of . Which value is going to be larger for a sample of N values of X: (X - M)/N or (X - )/N? Since M is the mean of the N values of X and since the sum of squared
Page | 30

deviations of a set of numbers from their own mean is smaller than the sum of squared deviations from any other number, the quantity (X - M)/N will always be smaller than (X - )/N. The argument goes that since (X - )/N is an unbiased estimate of and since (X - M)/N is always smaller than e (X - )/N, then (X - M)/N must be biased and will have a tendency to underestimate . It turns out that dividing by N-1 rather than by N increases the estimate just enough to eliminate the bias exactly. Another way to think about why you divide by N-1 rather than by N has to do with the concept of degrees of freedom. When is known, each value of X provides an independent estimate of : Each value of (X - ) is an independent estimate of . The estimate of based on N X's is simply the average of these N independent estimates. Since the estimate of is the average of these N estimates, it can be written as:

where there are N degrees of freedom and therefore df = N. When is not known and has to be estimated with M, the N values of (X-M) are not independent because if you know the value of M and the value of N-1 of the X's, then you can compute the value of the N'th X exactly. The number of degrees of freedom an estimate is based upon is equal to the number of independent scores that went into the estimate minus the number of parameters estimated en route to the estimation of the parameter of interest. In this case, there are N independent scores and one parameter () is estimated en route to the estimation of the parameter of interest, . Therefore the estimate has N-1 degrees of freedom. The formula for s can then be written as:

Page | 31

where df = N-1. Naturally, the greater the degrees of freedom the closer the estimate is likely to be to .

Page | 32

Bibliography Estimate - A quantitative assessment of the likely amount or outcome. Usually applied to project costs, resources, effort, and durations and is usually preceded by a modifier (i.e. preliminary, conceptual, orderofmagnitude, etc.). It should always include some indication of accuracy (e.g. + x percent). (Source: PMBOK Third Edition) Cost Estimate - A prediction of quantities, cost, and/or price of resources required by the scope of an asset investment option, activity, or project. As a prediction, an estimate must address risks and uncertainties. Estimates are used primarily as inputs for budgeting, cost or value analysis, decision making in business, asset and project planning, or for project cost and schedule control processes. Cost estimates are determined using experience and calculating and forecasting the future cost of resources, methods, and management within a scheduled time frame. (Source: Copyright 2007, AACE International, Inc., AACE International Recommended Practices, Number 10S-90) Base Cost Estimate The base cost represents the cost that can reasonably be expected if the project materializes as planned. Typically a variance is associated with the base cost. (Source: WSDOT working definition) NOTE: Base Cost Estimates are to be prepared by the project estimator in current year dollars and will exclude future cost escalation. The Statewide Programming Office escalates project estimates using WSDOT inflation tables (CCI, RWCI and PECI). Cost-Based Estimate - A method to estimate the bid cost for items of work based on estimating the cost
Page | 33

of each component (labor, materials, equipment, including contractor and sub contractor markups) to complete the work and then adding a reasonable amount for a contractors overhead and profit. (Source: WSDOT working definition) Historical Bid-Based Estimate This type of estimate tends to be a straightforward count or measure of units of items multiplied by unit costs. These unit costs are developed from historical WSDOT project bids and may be modified to reflect project specific conditions. This is the most common type of estimating at WSDOT. (Source: WSDOT working definition) Parametric Estimate A method to estimate the cost of a project or a part of a project based on one or more project parameter. Historical bid data is used to define the cost of a typical transportation facility segment, such as cost per lane mile, cost per interchange or cost per square foot. Historical percentages can be used to estimate project segments based on major project parameters. These methods are often used in early estimating, such as planning and scoping estimates. (Source: WSDOT working definition) Risk-Based Estimate Involves simple or complex modeling based on inferred and probabilistic relationships among cost, schedule, and events related to the project. It uses the historical data and/or cost based estimating techniques and the experts best judgment to develop a Base Cost or the cost of the project if the project proceeds as planned. Risk elements (opportunities or threats) are then defined and applied to the Base Cost through modeling to provide a probable range for both project cost and schedule. (Source: WSDOT working definition) Engineers Estimate - Typically the final estimate prior to bid opening. This estimate is loaded into
Page | 34

EBASE and locked prior to Ad. The project should have an accurate, complete Engineers Estimate PRIOR to going to advertisement. Revising an Engineers Estimate during the Ad period should be the exception, not the rule. However, bid period addenda that change the scope or cost of the work may require a revised Engineers Estimate or reconciliation of the changed value to serve as part of the justification for award. (Source: WSDOT working definition) Cost Estimating Manual for WSDOT Projects Page 3 November 2008 Construction Engineering (CE) The project management effort (budget/cost) of taking a project from contract execution through construction and project completion. Refer to the Plans Preparation Manual (PPM) 830.03 for guidance on estimating the CE cost. Construction Contingency A markup applied to the base cost to account for uncertainties in quantities, unit costs, and minor risk events related to quantities, work elements, or other project requirements during construction. See the Plans Preparation Manual 830.03 for guidance on estimating construction contingency. Allowance Additional resources included in an estimate to cover the cost of known but undefined requirements for an activity or work item. Allowances are part of the base cost. Preliminary Engineering (PE) The effort (budget/cost) of taking a project through planning, scoping, and design phases. Planning and scoping typically have separate budgets but are encompassed under Design or Preliminary Engineering (PE). The terms Design or Design Phase are sometimes used interchangeably with PE.
Page | 35

Risk The combination of the probability of an uncertain event and its consequences. A positive consequence presents an opportunity; a negative consequence poses a threat. Mobilization Calculated as a percentage of the total of the construction cost estimate, mobilization is included in a project estimate to cover a contractors preconstruction expenses and the cost of preparatory work and operations (such as moving equipment on site and staging). See Plans Preparation Manual 830.02 for guidance on selecting a mobilization percentage. Sales Tax The contractors liability to pay state sales tax for all items of work on a project, and WSDOTs responsibility to reimburse the contractor for state sales tax for work preformed on stateowned or private land, must be taking into account and included in all project cost estimates. Refer to the Standard Specifications section 1-07.2 for information on whether to include sales tax as a markup on individual bid item costs or as an adjustment applied to the construction total (including mobilization) of a project estimate, or a combination of both.

Page | 36

References Estimating Sample 01 and Estimating Sample 02 Prepared by: Tempest Company Prepared for: All of Our Clients Copyright 2009 Charles Sturt University Australia Project Management Cost Estimating Manual for WSDOT Projects November 2008 Washington State Department of Transportation file:///C:/Users/User/Downloads/Estimating%20Variance%20(1%20of%204). htm file:///C:/Users/User/Downloads/Characteristics%20of%20Estimators.htm Encarta Encyclopedias Www.wikipedia.com

Page | 37